Sunday, January 10, 2010

Retail flavoured chai!

‘Indian Retail’ is like ‘masala chai’. The adjective ‘Indian’ lends a certain flavour to retailing that is similar to how the adjective ‘masala’ tries to qualify an otherwise universally worshipped elixir-of- life called ‘tea’.

We have heard and read about how retailing in India is very unique and different from what it is in other parts of the world. How India itself is many cultures, languages and in fact; many countries wrapped into one and therefore, it is usually argued that mass customisation is never possible for the Indian market. Here, one size certainly doesn’t fit all! Retailers complain of not being able to apply a uniform merchandise mix or a uniform pricing strategy across their stores. They can’t also run uniform promotions and maintain uniform stock levels. They say, retailing is challenging and customers lack loyalty; they are bullish value-seekers; ruthless and unforgiving.

I feel, just as the ‘masala’ in the chai can be cardamom; cinnamon or ginger or a combination of all of them; retailing in India comes with its unique flavours and idiosyncrasies. Here, I am trying to sniff and smell retail and decipher from the different layers of evolution (from experience both, first-hand and second-hand), the deep rooted influences of the times; just as a tea-taster would look for the colour, aroma and flavour of tea to decipher its season and grade.

It doesn’t seem unusual that hailing as we are from the oldest civilizations; we Indians began to trade with each other much earlier than the rest of the world. I recall from my fading memories of school history textbooks that the exchange of goods and services in India predates the birth of Christ. I guess our ancestors pioneered the barter system and used it very successfully until currency was invented. I understand that the hunters, gatherers and agriculturists began to exchange one produce for the other - that lay the foundation for trade in India. Stones used in making weapons and metals used in making jewelry were amongst the most popular of accepted currencies that formed a precursor to coins that came into existence around 680BC. It is small wonder therefore, that we are known as a nation of shopkeepers – the supposedly 12 million retail outlets bear testimony to the fact that we are innately wired for trade, commerce and entrepreneurship.

Exchange of goods first happened between individuals – say, where one with a surplus of wheat but in need of sugar; and another with sugar in surplus but wanting wheat; exchanged the two commodities in a simple face-to-face transaction. This perhaps paved way to where a bunch of guys with different products each, got together and discovered they could benefit from exchanging them with each other, causing the creation of complex commerce much like what happens on e-bay today; but sans the virtual infrastructure and credit or debit transactions.

I guess the next stage of evolution in exchange of goods was through community congregations in small villages and towns – known popularly as fairs or flea markets. In a way, these flea markets were makeshift malls – a collection of merchants, each selling a different produce; capitalizing on the collective power to draw traffic due to the ‘destination effect’ that merchants, as individuals could not attract by themselves. Next came the nomadic versions of these fairs; that moved from one village to another and camped at each village for a certain period; providing the local consumers with opportunities for shopping; leisure and entertainment. For most of the six lakh villages in India, such fairs and flea markets are the primary sources for meeting their routine family shopping needs.

Somewhere down the road, Indian merchants came to accept the fact that it is important to reach out to their customers. They stepped out of fairs and ventured in search of their customers - a true case of the mountain going to Mohamed! Thus evolved mobile retailing – a model that every product category from ice creams to water purifiers has embraced in the modern times!

Tradesmen went on foot from street to street and house to house carrying their wares. They announced their wares (marketing – ATL to be precise) as they walked the lanes so that people could be drawn out of their homes. When they were successful in piquing people’s curiosity; they tastefully displayed their wares (visual merchandising). The merchant carrying bangles would carry a bundle each over both his shoulders; with those glass bangles glistening in the scorching sun; blinding the greedy housewife that looked at them longingly. They stopped by and accosted the woman and got her into a conversation (not necessarily with an intention to sell, but to very innocently drop the fact that the neighbour two doors away had become the proud owner of the latest bangles in town!). The merchant didn’t have to take lessons in psychology to know that women generally don’t pass an opportunity to be one-up against their neighbours and so she would begin examining the bangles. The merchant then allowed her to touch and feel the bangles and he even slipped a few bangles on her slender arms (with her permission of course!). When she was smitten by their colours and designs and was convinced that they would look better on her arms than on her plump neighbours’, she would not hesitate to part with her savings - stashed away in the earthen pot atop the attic, from the prying eyes of her drunkard husband. The merchant knew how to induce purchase through free sampling (BTL if you will). He of course possessed in abundance, the gift of the gab to talk her into buying – ‘selling skills’ that made an instant connect with the customer.

Having successfully acquired a customer; he would then proceed to understanding her preferences – knowing precisely what colours and patterns his customer liked so that he could come back to her with new stock – building “loyalty” through “customer intimacy”. Merchants dealing in different merchandise adapted different means of transport. The bangle merchant went on foot; the utensils seller used a push-cart with his wares hanging from wires strung around four posts at the corners of his cart; the vegetable vendor would tie a circular basket or two on his bicycle or would tastefully display his fresh produce on a gunny bag spread over a push cart.

I suspect that the credit for the sobriquet that India is a nation of shopkeepers; should squarely go to the Indian middle class and its business savvy. Middle class families that owned pieces of land were smart in making investments that bore fruit. They knew about annuities and cash flows more deeply (but crudely) than today’s wealth management experts. When they built a building on their piece of land, they added a couple of small eight by eight or ten by ten compartments on the ground floor facing the road and fixed shutters on them. This instantly converted the ‘shops’ into a revenue earning annuity when they rented them out. This ensured that the family would never go without food even if the bread winner were unable to earn. All they had to do was to find an enterprising soul to set up his wares there. I would imagine a hitherto travelling salesman - who had amassed enough credibility or had enough savings to serve as capital; or both - would make an ideal candidate to establish a ‘shop’. The first obvious choice of format was a shop that catered to the day-to-day requirements of its immediate neighbourhood – thus emerged the kiranas . Other formats that made their presence alongside were a tailoring shop; a bicycle repair shop (that would later metamorphosis into a two-wheeler mechanic); a laundry; a men’s salon and a few assortment of shops. This rash of raw ingenuity, when replicated across the million lanes and by lanes of India; spawned entrepreneurship; market penetration; new format introduction and what have you.

For a middle class family; the shop on the ground floor also served as an outlet for an entrepreneur within the family – either as a pass-time for ageing but active elders or for the second or third son of a wealthy farmer - who was more adventurous than his agriculturist father – and decided to forward integrate into retailing to sell the produce his old man produced on his farm. He typically catered to two or three streets in either direction and would therefore know the man and his wife and their children of the one hundred odd homes in the vicinity. Besides knowing the head of each family by their first names and occasionally (by their second wives); the shopkeeper would soon learn their personal preferences – brands; pack sizes; quantity required by each family; their periodicity of purchase and viola; he had his buying plan. He would by now have figured out how often his vendor’s salesman visited his village and would therefore order just the right quantities to last for the week or the fortnight as the case may be. There was no question of unsold or dead stock. Therefore, there was no markdown – planned or unplanned! There was also no shrinkage until his business grew in size and necessitated employing assistants! Only that a tube of toothpaste here or a bar of soap there or a kilogram of rice would go missing only and when the shopkeeper – out of sheer samaritanism - employed his second cousin’s good-for-nothing son as a store help!

So, what middle class families did to ensure a continuous source of income by creating shops in their premises; turned out to be a bank of juicy real estate for budding and aspiring retailers. It also became a capital investment for a family member who wanted to set up a business. When the second son of the farmer got married - as if in one masterstroke and a very strategic one at that – he acquired a pair of hands that could serve him as store help for practically no cost – just as a prince would marry the daughter of one of his vassal kings; settling politics with pleasure! If the business thrived; he would rope in his siblings or cousins and occasionally his parents and there he had an extremely successful store fully manned with reliable staff at zero manpower cost!

The shopkeeper had barely gone to school and so had his new wife or other store help. Therefore, education never figured in the scheme of things, and least as part of the eligibility criteria for the retail store. Apart from offering meaningful occupation to the entire family, this phenomenon fostered entrepreneurial spirit. It required very little working capital as the shopkeeper bought small quantities of merchandise each time and also enjoyed supplier credit. His low inventory model and quick replenishment ensured freshness of stock; facilitated a deft introduction of new products; increased stock turns and therefore a healthy GMROI. Add to this, practically no manpower cost and no shrinkage and (if the shop was located in the family-owned premises as most often was the case) there was also no rent outflow. Therefore, there was very little operating expense and that left little difference between gross margins and EBITDA or even PAT!

Indian entrepreneurship is too resilient to go out of fashion; and more so, its retail entrepreneurship. Panning our vision to modern retailing, we soon realise that customers have changed in their awareness and preferences. “Value” - an intangible that could take the form of price; quantity; durability (but surprisingly not so much quality) keeps customers and retailers go round and round in circles. Product and price differentiations are obliterating boundary lines between brands and retailers.

Only lessons culled out from this evolution - rich in essence and potent in sprit – can come in handy for every retailer to get closer to his customer. Home-made recipies may serve well for ‘Masala Chai’ but, retailing requires more than a fair share of willingness to constantly learn. Any retailer who cared to invest in applying these learnings to suit his business model; would benefit from the blessings of time-worn retail basics.